Leading the British charge ... Peter O'Toole in the 1962 epic Lawrence of Arabia, directed by David Lean.
Photograph: Ronald Grant Archive

Once, we had a British film industry that rivalled the best of Hollywood, from serious drama to comedy. And we had British directors, such as David Lean, Michael Powell, Lindsay Anderson, Ken Russell and many others, plus stars such as Peter O'Toole, Peter Sellers, Richard Attenborough, Margaret Lockwood and Julie Christie, who were internationally acclaimed.

Why? Because British film-making was being protected by quotas.

But it all came to an end on 1 January 1983, when Margaret Thatcher suspended them. Since then we have become a country where the film industry has gone the same way as the car industry: we build Japanese (and some French) cars, and we make films for Hollywood studios – as long as we give them big enough tax incentives, that is.

British film-making has been reduced to a cottage industry where film-makers have the option of either making films on virtually no money, or on small budgets with grants from the National Lottery. And these films only end up in our mainstream cinemas if Hollywood acquires them – and pockets most of the money in the process. It's hardly surprising then that 19 out of 20 of these truly British films loses money.

Quotas were first introduced in 1928, and by 1935, 20% of all films both distributed and exhibited in the UK had to be British. It is true that, because we were in the process of catching up with America and the system was open to abuse, some of these films were not that good. But this most definitely wasn't the case after the second world war when a rise in quotas to a massive 45% ushered in what came to be known as the "golden age of British cinema".

What's more, the 1960 Film Act made it illegal for distributors to force exhibitors to take particular films, for example, to bundle films together so that cinemas could only screen the latest blockbuster if they took several of the studio's other films as well. This, too, was scrapped by Margaret Thatcher, with the result that today it's Hollywood's common practice when it comes to cinemas and selling screening rights for television.

The scrapping of quotas has proved to be a disaster in other countries as well. For example, in 1992 the US, as part of the North American Free Trade Agreement, demanded their repeal in Mexico. The next few years saw a near total collapse of Mexican cinema, with production falling from more than 100 features per year down to single figures. In an attempt to save the industry, the Mexican government reintroduced a 10% quota in 1997.

South Korea demonstrates that the introduction of quotas has the opposite effect. First introduced in 1967, South Korea progressively raised the quota from around a nominal 10% to effectively 40% by 1985, creating conditions whereby it was worth investing in domestic film production. The result was an industry in which South Korean films regularly outstrip even the biggest Hollywood blockbusters at the box office, and which has survived the halving of the quota, under US free trade pressure, in 2006.

Other examples include the re-emergence of both Spanish and Latin American cinema, France's continuing significance, and, one could even argue, the US itself, where Hollywood's control of the North American market effectively adds up to a 95%+ quota.

Of course, there are those who say that the problem is not quotas but quality, and that people go to see American films because they're better. But, outside of the blockbusters, time and time again the box office returns tell a different story. British films are lucky if they open on 75 screens – whereas Hollywood films will be at six or seven times as many. However, the audience for Sex & Drugs & Rock & Roll was larger than that for Did You Hear about the Morgans?, Ninja Assassin, Youth in Revolt and The Wolfman.

And, similarly, even after it had been on release for a staggering 24 weeks, An Education was still playing to an average audience that would have put it in the top 10 if it had seen a wider release.

It's only quotas that will give British films and distributors a fair crack of the whip. Without them we will simply continue to throw lottery money away on films that, no matter how good they may be, have virtually no chance of being shown outside London.